Like all financial products, Mutual Funds too have an intermediary who connects an investor to the Asset Management Company by way of different schemes.
Right from the advent of Private Mutual Funds in the early 90’s they helped in the selection of funds (which was not a big task those days, as the number of funds was a lot less), filling up the form(s) and doing the leg work. Even though the distributors were not too familiar or educated in Financial Planning, they did a reasonably good job for the money that they were being provided by the AMC as an incentive.
The hey days were those of 2.25% entry load and almost 2% exit load, so the distributors were a happy lot with trailing commission of the investments flowing in as long as the investment was there.
This model of commission was in line with that of the LIC agents – whose commissions were intact.
Then in the August of 2007, a benevolent SEBI chairman scrapped the Entry load and the MF schemes suddenly became cheaper. Further on the exit load became less and the further squeeze on the commissions.
However, the trailing format of the commissions still stays on even though it has come down drastically to about 0.6% for equity and to about 0.12% for debt funds.
But what does TRAILING mean?
It means that if you made a modest investment of Rs.1.0 lac in the year 2000 and it has grown to Rs. 10 lac today- then your distributor will get the appropriate commission for each and every year to date on not only the original investment but any successive purchases that you had made. This was a price for keeping you invested and I fully support it because most of the investors need that guidance and motivation from the distributor.
1.But what is their relevance today?
2.Do we need them with the Direct Schemes that the MF companies have launched parallel to each “normal” retail scheme?
3. How safe are these distributors with regards to trusting our money with them?
4.What service are they really providing us with in these times of net transactions?
5. Finally! Can I have a mid way between the Normal Retail Plan and Direct Plan, so that I can pay what is the relevant remuneration for the service?
I feel that I am somewhat qualified to answer this question for two reasons:
1. I had always invested through a MF advisor/distributor for the entire period of my earning and investing life.
2. Though I spread awareness about investment and personal planning, I am not beneficially or gainfully connected with any person or entity who has a business interest in Mutual Funds or any element of Personal Financial Planning.
The Mutual Fund Distributor: is still very relevant today, especially for a new investor and especially for the Seafarers, but only if he is a certified ADVISOR or a DISTRIBUTOR by the SEBI. He should also have an AMFI certification and his “own” ARN NO. Some distributors act as “sub brokers” to the main distributor on some commission sharing basis. These should be avoided as they are not qualified or experienced enough to guide an investor.
I feel that when one starts investing by way of Mutual Fund, one needs to learn a lot of nitty gritty which otherwise he may learn at his own cost…and what is more… an enormous opportunity cost.
It simply isn’t easy to select a good fund with LOOOONG term view. A good advisor/distributor can help you with that.
There are over 1800 Mutual Fund schemes to select from 48 AMCs. For a direct and that too a first time investor this can be a mammoth and a daunting task.
Hence starting off with an A/D is a good and certainly recommended idea. Yes, there comes a time in 3-4 years, in which if you have taken an active interest and your portfolio has satisfactorily progressed- then you may consider going Direct.
However, my experience with fellow investors is that once they start getting good returns from their MF investments and good advice from the A/D, they prefer to stick with him, as the feeling that a small timely advice has saved them lakhs and even a crore at times.
A question you may ask here- How do you know if my distributor of Advisor is genuine or not; or if he is acting in my interest.
Answer: Check your portfolio. If your A/D has ever enticed you to invest in a Closed ended Fund, NFO at the peak of a bull run (because such funds never come in the down turn times). Further on if your share in such funds is actually quite high… then you have all the reason of knowing that the scheme was sold to you for his 4% upfront commission and even attractive trails.
{However you can also kick yourself for not reading my e-book available for free from marineinsight.com :)}.
Answering the Third question is much easier. A Mutual Fund scheme is a contract between you and the MF AMC. The A/D is just a conduit to have connected you to the right scheme or not. He will fill your forms, get your KYC done and kick-start your investment. If you have issued a cheque from your designated account in favor of the MF scheme- even a fly cannot hurt your investments- you are 100% safe.
Mutual Funds are so heavily regulated and hence safe that even you will not be able to invest from an account which is not connected with that particular Portfolio.
The Fourth Question is about their service which they (A/D) provide outside of what we can get on the net.
As you have seen quite often on the net, the amount of information is mind boggling. If Financial Management is not your profession, chances are that you will never get the info which is relevant to you.
An A/D helps you with the precise info and services that you may need.
There is also an element of hidden knowledge.
The Analysts and Distributors regularly meet with Fund Managers from various Asset Management Companies (AMCs) at educational seminars to enhance their knowledge. During these seminars, the Fund Managers, as well as the Chief Investment Officers (CIOs) and Managing Directors (MDs) of the AMCs, share their long-term views on their funds. Additionally, the Analysts and Distributors receive personal messages and alerts regarding potential government policy changes, allowing them to stay informed and potentially benefit from this information.
One key question that arises is finding a middle ground between opting for a Retail Plan with commission fees or choosing direct plans without commission. A possible solution could be to ask your distributor to opt for a Direct plan and establish a commission model with them. By setting up a mutually beneficial arrangement, where the distributor receives a lower trailing commission of 0.60% and you benefit from a different model, a middle ground can be achieved. With the innovative thinking that Indians possess, a satisfactory compromise can be found.
If you have any further queries or would like to discuss this topic in more detail, feel free to post a query or send an email to ka***************@gm***.com. Additionally, you may also enjoy reading “The Financially Illiterate Mariner – Are You One Of Them?”
Overall, this article aims to provide insight into navigating the complexities of investment plans and finding a balanced approach that suits both investors and distributors.